The authors of this chapter conceptualize the “three-failures” perspective in nonprofit-sector theorizing. They then propose the sectoral advantage framework, which revises and generalizes the three-failures approach. The revised framework offers a set of questions and a way of thinking about and interpreting diverse puzzles in the field. The framework uses consistent definitions and criteria so that it can be applied to a broad range of institutions, cultures, and historical periods. The authors develop three themes within the framework: First, they add the family sector and consider its comparative advantages, failures, and activities. Second, they generalize government failure to make it more comprehensive and applicable outside Western democracies. Third, they suggest the capability approach should be incorporated in the determination of sectoral advantages.

Witesman provides an institutional theory of the nonprofit. The chapter considers the argument developed by the author in a 2016 Nonprofit and Voluntary Sector Quarterly article. In it, she proposes an institutional theory of the nonprofit that defines its distinction from public and private institutions through (1) the voluntary (rather than coercive) assignment of roles and (2) the use of the good or service by non-payers. The voluntary and redistributive nature of such nonprofit-type institutions makes them primarily compatible with the distribution of goods that are non-subtractable and excludable (toll goods). This view is in contrast to legalistic or sector-based theories of the nonprofit.

In this concluding chapter, the editors take stock of the contributions, summarize overarching themes, and suggest new directions for research.

The chapter introduces readers to the major theories of the sector. Those covered include: market-failure theory, government-failure theory, contract-failure theory, voluntary-failure theory, supply-side (or entrepreneurship) theory, social-origins theory, interdependence theory, the commons, mediating structures, and associationalism.

This introductory chapter makes a case for the value of considering the role and purpose of nonprofits in society. It defines “theory” in accessible terms and describes the scope of nonprofit-sector theory. It also previews the subsequent chapters.

The theory of the nonprofit institutional form introduced by Henry Hansmann more than 40 years ago proposed that informational problems, specifically information asymmetry, explains the essential defining feature of the nonprofit organization – the so-called nondistribution constraint. While the conventional argument holds that an asymmetry of information arises due to intrinsic, hard-to-measure attributes of nonprofit outputs, this chapter argues instead that informational problems arise because private purchasers fail to sufficiently value the positive externalities of information. In short, information is a social good, rather than a private good, and neither purchasers (donors) nor producers (nonprofits) have sufficiently strong incentives to systematically incur the costs and risks associated with generating information. The undervaluing of information by private parties results in a symmetry of ignorance that may lead to “benefit failure” in the form of foregone social impact. This type of failure is induced by transaction, allocative, and production inefficiencies resulting from the symmetry of ignorance.

This chapter explores the nature of nonprofit-sector theory. To do this, we first examine what we theory, and what we mean by nonprofit-sector theory. We also propose a framework for evaluating what makes good nonprofit-sector theory, based on the function of theory (define, describe, explain, prescribe, predict, and evaluate) and the theory's depth, breadth, and relevance. For this volume, we have taken a broad and inclusive approach to nonprofit-sector theory, defining it as answering the questions, “What is the nonprofit sector?” and “Why does the nonprofit sector exist?”